Change and Continuity in Social Policy Responses to

Economic Crises in South Korea: 1979~81 vs. 1997~98

Jae-jin YangYonsei UniversityOctober 13 2011

The 5th Seoul ODA International Conference

I. Introduction

II. Social Policy Responses by the Chun Doo Hwan Government1. The Rise of the 1979-81 Economic Crisis and Economic Reforms 2. The Consequences of Fiscal Conservatism and Social Policy Responses

III. Social Policy Responses by the Kim Dae Jung Government1. The 1997-98 Economic Crisis and Social Consequences 2. Social Policy Responses by the Kim Dae Jung Government

IV. Discussions1. Democracy and Change in Social Policy Response2. Strong Principle of Contributory Social Insurance, Fiscal Conservatism and Continuity of Social Policies 3. Policy Implications for Developing Countries

V. Conclusion

Table of ContentsTable of Contents

○ Korea as one of the advanced countries: • The 15th largest economy in the world with a per capita income of $29,792 in 2010.• “fully functioning modern democracy (CIA, 2008)”

○Puzzle: Different social policy responses to similar economic crises in Korea

• Social policy responses• The Change and Continuity of social policy choices

○Method: Comparison of the governments’ responses in 1979-81 vs. 1997-98

I. IntroductionI. Introduction

Chun Doo Hwan government (1980~1987)

Kim Dae Jung government (1998~2002)

Neo conservative reforms Neoliberal economic reforms

__ ___ __ ___ _______ _____ ___ _______ ______ ○ __ ___ __ ___ _______ _____

– ____ _ __________ ____ ______ __ _________ ________ ______ ___ _____ _______ _____ __ ______ __ _____

– ___________ _________ _______ _______ _______ _______ _______ _______ ______ ____________ ____

1. The Rise of the 1979-81 Economic Crisis and Economic Reforms ○The Rise of the 1979-81 Economic Crisis

– After a relatively long period of sustained economic growth, the Korean economy began to falter in 1979. (Figure 1).

– GDP contraction, inflation, falling exports, growing current account deficit, rising unemployment rate.

II. Social Policy Responses by the Chun Doo Hwan GovernmentII. Social Policy Responses by the Chun Doo Hwan Government

Sources: www.kosis.kr (accessed on May 22, 2011)

Figure 1. GDP Growth Rate and Unemployment Rate (1970-2010)

1. The Rise of the 1979-81 Economic Crisis and Economic Reforms ○A broad consensus that economic mismanagement over the 1970s was also to blame.

– an excessive increase in the total investment in heavy and chemical industrialization– inflationary pressure, labour shortages– the sharp surge in wage rates– the HCI drive fostered Chaebol (family-owned business conglomerates in Korea)

<Response 1>Fiscal austerity

– Drastic budget cut – substantial fiscal cuts in most Funds– tight monetary and credit controls

<Response 2>Reorganization of the industrial policy

– the rationalization of six problem sectors – reduction of economic concentration

II. Social Policy Responses by the Chun Doo Hwan GovernmentII. Social Policy Responses by the Chun Doo Hwan Government

2. The Consequences of Fiscal Conservatism and Social Policy Responses

<The consequences>negative impact on social spendingno noticeable program development

– “the off season” for the development of social welfare in Korea (Lee, Hyekyung, 1993: 73).

<Efforts to escape from the dilemma to fiscal conservatism and the political necessity>

the gradual expansion of the existing social Insurance Schemes (NHIS + Industrial Accident Insurance)the increase of voluntary corporate welfare through tax incentives and policy loans

– Corporate welfarism began to be rooted in the Chun period, signaling a widening gap between the large and small businesses in the future.

II. Social Policy Responses by the Chun Doo Hwan GovernmentII. Social Policy Responses by the Chun Doo Hwan Government

<The Economic Crisis’ effect>Undermining economic performance

–Korea’s inability to service its debt payments–Foreign reserves dwindling to less than $8 billion–the Korean currency’s rapid depreciation–The government’s budget balance plunging to -4.4% of GDP in 1998

III. Social Policy Responses by the Kim Dae Jung GovernmentIII. Social Policy Responses by the Kim Dae Jung Government1. The 1997-98 Economic Crisis and Social Consequences

1996 1997 1998 1999.1/4 1999.2/4 1999.3/4Headcount Poverty Index (urban)a 9.6 8.6 19.2 - - -

Wage Income Shareb

- Highest 20%- Middle 60%- Lowest 20%

37.953.98.2

37.254.58.3

39.852.87.4

41.351.67.1

39.553.07.5

39.053.67.4

Wage Income Ratiob 4.63 4.49 5.41 5.85 5.24 5.29Asset Income Ratioc - 17.1 - 38.6Gini Coefficientb 0.291 0.283 0.316 0.333 0.311 0.310Note: Wage Income Ratio = Highest 20%’s share/ Lowest 20%’s share; Asset Income Ratio = Highest 10%’s share/ Lowest 10%’s share

Source: Moon and Yang (2002a: 142).

Table 1. Poverty and Inequality Pre- and Post-Economic Crisis in Korea

Serious consequences for social equality and welfare

– Growing poverty and inequality Increasing inequality of wealth

2. Economic Reforms by the Kim Dae Jung Government

○Drastic reform measures to deregulate and liberalize the economy.• lifting restrictions on capital movement and foreign ownership• the government’s facilitation of the laying-off of workers to increase labour market flexibility• the government’s a series of measures to make the economic system more transparent and

accountable

III. Social Policy Responses by the Kim Dae Jung GovernmentIII. Social Policy Responses by the Kim Dae Jung Government

2. Social Policy Responses by the Kim Dae Jung Government

<Responses>

Expanding the coverage and the benefits of the four major state-administered social insurance schemes

– due to the mass unemployment and related social problems, programs protecting individuals against unemployment grew at the fastest speed

– the state-administered pension and health insurance schemes made another rapid expansion of pension, employment insurance scheme

– Integration of NHI also contributed to the tightening of the nation’s social safety net

Thoroughly overhauling the public assistance program– rejuvenation of public assistance programmes with fresh legislation to guarantee a minimum

standard of living regardless of age or work capacity– it marks a turning point from the Elizabethan Poor Law-style public assistance in which the

state distinguishes the deserving from the non-deserving poor and protects only the former (Ministry of Planning and Budget, 1999; Ministry of Health and Welfare, 1999).

III. Social Policy Responses by the Kim Dae Jung GovernmentIII. Social Policy Responses by the Kim Dae Jung Government

1. Democaracy and Change in Social Policy Response

○The Korean cases verify that the impact of economic crisis on social policy responses is neither uniform nor unidirectional.

IV. DiscussionsIV. Discussions

Chun Doo Hwan government (1980~1987) Kim Dae Jung government (1998~2002)Inactive comprehensive social safety nets Considerable stride toward a welfare state

in economic hard times

Emergency measure: public works

•temporary increase in social assistance and expanding

job opportunity in the Middle East

•Gradual expansion of social insurance coverage

•Corporate welfare

• Social insurance coverage was expanded to cover the entire working

population

• fragmented health associations were unified

• public assistance program was beefed up

○ Why? Democracy brought about a new playing ground for pro-welfare political forces.• Kim Dae Jung took power and the progressive forces• In democracies, there is no other way for politicians but to respond to growing demands on social policies and

electoral competition induces greater government spending to reduce crisis-generated inequalities of risk and income(Garrett, 1998). These tendencies were stronger where leftist political forces hold onto power. South Korea in the late 1990s was the case in point. Without democracy and power shift to progressive political forces, continuity rather than change would have dominated social policy responses to economic crisis.

2. Strong Principle of Contributory Social Insurance, Fiscal Conservatism and Continuity of Social Policies

○ Substantial improvement was made during and after the 1997-98 economic crisis under the leadership of President Kim Dae Jung. But this change was also accompanied by path-dependent continuity.

• contributory social insurance was the solution

• There remains a large loophole in the social safety nets (Table 2).

• The NBLSS was tarnished by strict means test and family responsibility rule.

IV. DiscussionsIV. Discussions

Pension Health Employment RetirementAllowance

Large FirmsRegular Workers 99.1 99.7 78.7 98.3

Non-regularWorkers

83.7 96.5 74.5 71.5

SMEs

RegularWorkers

78.3 95.7 63.6 70.5

Non-regularWorkers

47.6 88.9 37.0 33.4

Table 2. Effective Coverage Rate of Social Insurances and Retirement Allowance(August 2008, %)

Note: Large firms are enterprises with 300 and more employees. SMEs are abbreviation of small and medium-sized enterprises with less than 300 employees. Source: Calculation by author based on Korean Statistical Information System (http://www.kosis.kr)

3. Policy Implication for Developing Countries

○ We can draw some lessons from the two Korean cases① the utility of public works

• Public works have been an effective counter-cyclical measure for income assistance and

employment creation in Korea.

• But it should be noted that public works were as an emergency measure to provide unskilled

and semi-skilled workers with short-term employment at lower wages than the statutory

minimum wage. In order to provide protection for the entire working class, comprehensive

measures such as universal social insurances are recommended.

② the necessity of pre-emptive introduction of social security schemes, especially unemployment

insurance and pension programs

③ combining tax-based scheme with statutory social insurance programs (refer to Table 2)

IV. DiscussionsIV. Discussions

○Social policy responses by two Korean governments to the similar economic crisis

There are differences between Chun and Kim’s Government

Democracy and partisanship helped expand the Korean welfare state in economic hard times.

Nevertheless, the Kim government’s pro-welfare policies could not break the old mold based on

strong contributory social insurance principle.

If Korea had developed tax-injected social insurance schemes (especially EIS) earlier, then it

could have more effectively protected the victims of economic crisis.

Pre-emptive introduction of tax-injected social safety nets in good times are recommended for

developing countries.

V. ConclusionV. Conclusion